One of the main concerns of every entrepreneur is to know at all times the state of the financial health of their business. For this it is essential to make constant checks that allow both to maintain the economic stability of the company itself, as well as to foresee possible problems that could arise in the future,and thus manage to reverse the situation before it is too late.
Therefore, in AYCE Laborytax we are going to give you the necessary guidelines to measure the financial health of your company and check if your business is working as expected.
Keys to measure the financial health of your business and get ahead of problems
Does your company have enough liquidity?
The first thing you should do to know first-hand the state of health in which the finances of your business are, is check how liquidity is,something essential if you want to maintain your company not only in the short term, but for a long period of time.
To do this you will have to analyze the amount of cash you have available,and also the assets, which in the future could be converted into cash. In this way you will know if you are in a position or not to fulfill your economic obligations.
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There is a financial ratio that will be of great help to check if your company has sufficient liquidity,which is known as the acid test, and whose formula is as follows:
Acid test = (current assets – inventories) / current liabilities
In this way, putting us in the situation that you have a current asset of 20,000 euros, inventories of 12,000 euros and a current liability of 10,000, after applying the acid test the result would be 0.8 euros. This means that you would have 0.80 euros to pay each euro that the company owes, and that therefore, you would not be in a position to face the total debt without selling part of your assets.
Is your company solvent enough?
When we talk about whether a company is solvent or not, we are referring to whether it is in a position to meet its debt obligations at this very moment. To verify this, it would be necessary to know the relationship between the debt and the capital of the company.
“Financial ratios are indicators that link two variables within a company’s finances, for financial analysis and decision-making.”
If such a ratio were low, it would mean that it is the shareholders who are financing the operations, rather than the creditors, something that would be a great advantage for the company, and that would certainly be a sign of its solidity.
Is your company efficient?
One of the keys for a company to enjoy good financial health is that it is efficient, something that can be measured through an indicator known as operating margin.
The operating margin shows the percentage of a company’s profits, before interest and taxes, of total sales. The higher the company’s operating margin, it will mean that the company is getting a higher amount for every euro it earns through its sales.
The result of the operating margin will show if the management of a company is being correct,as well as if the company is being able to overcome those financial obstacles that it encounters throughout its activity.
Does your company have the necessary profitability?
Although it is true that a company could remain for a period of time without being profitable, the reality is that to survive the passage of time it is essential to have sufficient profitability.
To know whether or not the company is profitable, the indicator on which to rely is the net margin,between net profit and turnover.
The higher the net margin, the higher the company’s financial safety margin, which will indicate that the company is in a better position to invest capital in its growth and expansion.
Company money, it’s company money
Another fundamental element to maintain the good financial health of the company, is not to use the money belonging to the company itself to satisfy personal expenses of the entrepreneur.
The company’s money must be used responsibly,otherwise the economic security and future of the company itself could be put at risk.
Measuring the health of your company regularly is essential to know if it is working properly, since over the course of a year a large amount of financial accounting data is collected that must be analyzed and evaluated. In this way you can establish strategies and take solutions in case of setbacks in the entity.